Compliance & Regulation

Federal Housing Administration endorsements of single-family loans fell only 9.7% in fiscal year 2006 after a precipitous 44% drop in fiscal 2005.Despite the decline, FHA production increased in dollar terms. The FHA insured 501,984 single-family loans in fiscal 2006, compared with 555,557 loans the previous fiscal year. In dollar terms, FHA production totaled $72.8 billion in the fiscal year that ended Sept. 30, compared with $62.3 billion in fiscal 2005. Department of Housing and Urban Development officials say they believe they have stabilized the FHA's market share by implementing administration changes to align the FHA's practices with conventional lending practices. HUD also is backing FHA modernization legislation that has passed the House but has run into opposition in the Senate. "I think they have stopped the bleeding," said Bud Carter, an FHA consultant with Potomac Partners in Washington. "Whether they can come back is still up in the air. They really need the legislation to make a difference."

On Oct. 23, Fannie Mae will report on its review of current employees and directors and recommend disciplinary actions against specific individuals as a result of their involvement in the company's $10 billion accounting scandal.As part of a consent agreement with it regulator, the Office of Federal Housing Enterprise Oversight, Fannie Mae was required to review the conduct of all individuals identified by OFHEO in a May 2006 examination report about the government-sponsored enterprise's efforts to manipulate earnings. The report that Fannie will deliver to OFHEO on Monday will not only identify what actions should be taken against individuals but will also include plans to seek restitution, disgorgement, or other remedies. "I am waiting to see their recommendations, and then we will look and see if we agree," OFHEO Director James Lockhart told reporters. Fannie Mae can be found online at http://www.fanniemae.com.

Regina Lowrie, outgoing chairman of the Mortgage Bankers Association, has joined The Prieston Group, a Novato, Calif.-based provider of mortgage fraud insurance, as a principal.Ms. Lowrie, a 29-year veteran of the mortgage banking industry, is currently president and chief executive officer of RML Investments Inc., a consulting firm. She was previously the founder and president of Gateway Funding Diversified Mortgage Co., Horsham, Pa. "I believe mortgage fraud against lenders is one of the most troubling issues facing our industry today and that TPG's promotion of industrywide best practices is a key component in addressing this problem," Ms. Lowrie said. TPG, which also provides fraud-related training and loss mitigation, can be found on the Web at http://www.priestongroup.com.

Federal Reserve Board Governor Susan Bies says the outlook for mortgage credit quality is "favorable," despite a recent rise in subprime delinquencies."While we continue to expect mortgage delinquencies will remain manageable, lenders should closely monitor future developments," Ms. Bies told the American Bankers Association annual conference. The Fed governor did caution that lenders might have placed too much emphasis on future income growth and collateral values in making nontraditional mortgages. And too many of these interest-only and payment-option adjustable-rate mortgages went to subprime borrowers over the past two years, she said. Separately, the federal banking regulators have issued a consumer information pamphlet on interest-only and option ARMs.

Federal Reserve Board Chairman Ben Bernanke says the federal banking regulators will be issuing a new and updated risk-based capital proposal soon that would apply to most domestic banks and thrifts."The agencies have been developing a modernized but easy-to-implement capital framework, known as Basel Ia," the Fed chairman told bankers attending their annual conventions. "The notice of proposed rulemaking should be issued soon." Basel Ia is designed to make the capital treatment of mortgages and certain other assets more risk-sensitive than the current Basel I standard. It is also designed to reduce any competitive advantages the largest U.S. banks might derive from adopting Basel II, which is a more sophisticated RBC proposal the regulators have been working on for several years. The Fed chairman said the regulators will consider suggestions that small institutions should have the option of staying with Basel I. "We will consider this possibility carefully," Mr. Bernanke told the America's Community Bankers and American Bankers Association convention via a satellite hookup.

The insurance commissioner for Washington state has issued a report maintaining that title insurers "routinely" break state law by allegedly using illegal incentives and inducements to attract business.The real shocker, said Mike Kreider, "was the scope and the extent of the abuse." Washington state law limits incentives and inducements to $25 per person per year. Even companies that received praise for being in substantial compliance had a number of violations over the 18-month period studied, the report said. The department said it will issue no fines, but will focus on prevention and compliance. Mr. Kreider also announced the formation of a work group to study issues such as whether Washington state should adopt a system similar to one used in Iowa, under which there is no title insurance but the state government provides title protection services. A statement from LandAmerica, one of the companies cited, said: "All too often, these laws and regulations are unclear at the state and federal level. There are many ambiguities in the current regulations regarding inducements, producing disagreement between the title insurance industry and the Washington DOI concerning what's proper and improper." Other national companies cited in the report are Fidelity, First American, Old Republic, and Stewart.

Ginnie Mae is going ahead with a new program to guarantee pools of reverse mortgages insured by the Federal Housing Administration, known as home equity conversion mortgages, and create an accrual mortgage-backed security that will not have a payment schedule."We are confident the Ginnie Mae security will foster a robust secondary market for reverse mortgages," Ginnie President Robert Couch said at a news conference announcing the HECM MBS program. Ginnie Mae and its supporters say they expect the MBS program to increase the availability of HECMs and reduce origination costs to make the reverse mortgages a better deal for senior citizens. However, investors in the federally guaranteed HECM MBS will not receive payments of principal and interest until the borrowers leave their home or die, or the payouts on the HECM loan reach 98% of the claim amount. The Ginnie president added that his agency, as well as lenders and servicers, has to make "a lot of system changes" to issue HECM securities. It could take until next summer to do the first deal, he said. Ginnie Mae can be found online at http://www.ginniemae.gov.

National banks are continuing to ease their underwriting standards on home loans when they should be tightening, according to Comptroller of the Currency John Dugan.With the red-hot housing market cooling, "we would normally expect" lenders to tighten their underwriting standards and require borrowers to provide more equity, Mr. Dugan told the American Bankers Association annual convention. However, examiners from the Office of the Comptroller of the Currency are finding that bankers, giving in to competitive pressures, are easing underwriting standards. The comptroller reported that the OCC's 2006 underwriting survey, which is due to be released soon, shows a significant easing in residential mortgage standards. "We saw more of what we observed the previous year: longer interest-only periods, more piggybank loans to avoid mortgage insurance requirements, higher allowable debt-to-income and loan-to-value ratios, and greater volumes of loans with reduced documentation requirements," he said. The OCC can be found on the Web at http://www.occ.treas.gov.

One year after the implementation of bankruptcy reforms, credit counselors are finding that consumers contemplating bankruptcy are in such dire financial condition that bankruptcy is their only option, and many are delinquent on their mortgage, according to a survey by the National Foundation of Credit Counseling.On average, consumers signing up for pre-filing counseling have unsecured debt that exceeds their annual income by $11,600. The NFCC also noted that 42% of the credit counseling agencies in the survey reported that 26% to 100% of their pre-filing clients are delinquent on their mortgage payments. (In passing bankruptcy reform, Congress mandated that consumers receive credit counseling before filing for bankruptcy protection.) Bankruptcy filings are estimated to total 600,000 this year, which would be the lowest level in 20 years. However, filings are increasing each month and some estimate it will cross one million in 2007-- due to energy prices and the resetting of adjustable-rate mortgages, according to the NFCC report.

As demand for residential mortgages continues to slow, most Federal Reserve district banks are noticing a pick-up in commercial real estate construction and lending."Commercial construction gained strength in most of the country" during September, according to the Federal Reserve Board's Beige Book. "Reports on residential real estate indicated, however, widespread cooling with the majority of districts citing lower asking prices, rising inventories of homes on the market and softening sales." Several Federal Reserve banks reported that homebuilders and home sellers are offering incentives to attract buyers. "Softer home demand in San Francisco led to layoffs for mortgage brokers and real estate agents," the Fed report said. The Beige Book said the "weakness" in residential lending is being offset by increases in CRE and business lending.